Law back to the drawing board

The strongest signal yet that the patchwork of today’s company law could be consigned to the dustbin of history began to land on finance directors’ desks last week. The long-awaited publication of the government’s company law review has thrown open to question almost everything currently held sacred: from the basis of accepted financial reporting to the role of the shareholder.

Only insolvency and directors’ pay have escaped the remit of the company law review steering committee.

A chapter of the report of the steering group – chaired by John Lewis partnership chairman Sir Stuart Hampson – is dedicated to high-level reporting and accounting issues. The controversial statements it makes will lead to one of the greatest debates about accepted practice in years. Turn to part 6.9 and read: ‘The focus is still too strongly on historic cost and on tangible assets and that this no longer meets the needs and expectations of a modern economy, in which prospects of and risks to businesses, and ‘softer’ assets, such as intellectual and human capital, are of increasing importance.’

But PricewaterhouseCoopers head of professional affairs Roger Davis says he would have been surprised if this issue had not been mentioned.

‘There is an argument that, with the substantial growth in service industries and the relative decline in manufacturing, the balance sheet has become no more than a record of liquidity. What is the future of the balance sheet? There has to be a debate,’ he says. The more fainthearted will also be dismayed to see the report raise the issue of accountants being given new statutory responsibilities when conducting audits.

With the Turnbull committee soon to make its corporate governance research public as well as limited liability partnerships edging their way into law, it is crucial for auditors to stake their claim for a clarification of their duties to avoid becoming the scapegoat when things go wrong.

Davis says the time is right for a ‘liability contest’.

Sir Stuart Hampson says his group supports the complete rewriting of company law from a small company perspective: ‘Let’s do things the other way round and build up to bigger companies to allow flexibility.’

The report questions the need for small companies to release public accounts at all. It says these could be replaced with a simple statement of solvency, while there could also be big changes to the way small companies are incorporated.

And if that wasn’t enough, there is also the suggestion that certain documents, such as annual accounts, could be sent to Companies House by email. Quite a revolution.

But organisations such as the Federation of Small Business and professional accountancy bodies such as ACCA are united in warning of the dangers of doing away with rules which are vital in protecting creditors.

FSB company law and insolvency committee chairman Tom Preece says that, while he welcomes the report, making it easier to set up a business could provide a loophole for rogue directors.

ACCA small business committee chairman Chris Christou agrees. He argues that although small businesses are overwhelmed by red tape, creating a situation where insolvency practitioners are left to pick up the pieces could be very harmful to the economy.

Away from the area of small companies, there is also the prospect of the UK taking on board the looming International Accounting Standards issue. Many accountants argue that talk of IASs is an irrelevance. ‘Harmonisation is only as good as the enforcement mechanism in each country,’ says Portsmouth University principal accounting lecturer Stella Fearnley.

Given the fundamental nature of the review, that there are so many gloom-mongers is inevitable. But many see the review as a chance to enhance financial reporting. Peter Clark, group FD of Conrad advertising, says: ‘A private company can publish accounts up to ten months after financial year-end and by this time it’s useless. Any attempt to speed up reporting is good.’ Perhaps tellingly, he adds: ‘But I doubt it will happen.’

COMPANY LAW REVIEW – HIGHLIGHTS

– UK should allow use of International Accounting Standards to support competition

– Current focus on historic costs and tangible assets too strong and no longer meets needs of a modern economy

– Concern that requirements of Companies Act overly burdensome for small companies

– Relative roles of directors, auditors and company should be reviewed

– Electronic communication between company, Companies House and shareholders mooted

TIMETABLE

1 JUNE 1999: deadline for responses; Accounting, Reporting and Disclosure group to take forward the issues, including the annual report and accounts, constraints on financial accounting and wider reporting questions